The total cost of downtime for Global 2000 companies is $400 billion annually — or 9% of profits — when digital environments fail unexpectedly, according to The Hidden Costs of Downtime, a new report from Splunk, in collaboration with Oxford Economics.
Source: Splunk
The analysis revealed the consequences of downtime go beyond immediate financial costs and take a lasting toll on a company's shareholder value, brand reputation, innovation velocity and customer trust.
Unplanned downtime — any service degradation or outage of a business system — can range from a frustrating inconvenience to a life-threatening scenario for customers. The report surveyed 2,000 executives from the largest companies worldwide (Global 2000) and showed downtime causes both direct and hidden costs as defined below:
■ Direct costs are clear and measurable to a company. Examples of direct costs are lost revenue, regulatory fines, missed SLA penalties and overtime wages.
■ Hidden costs are harder to measure and take longer to have an impact, but can be just as detrimental. Examples of hidden costs include diminished shareholder value, stagnant developer productivity, delayed time-to-market, tarnished brand reputation and more.
The report also highlighted the origins of downtime — 56% of downtime incidents are due to security incidents such as phishing attacks, while 44% stem from application or infrastructure issues like software failures. Human error is the number one cause of downtime and the biggest offender for both scenarios.
However, there are practices that can help reduce downtime occurrences and lessen the impacts of direct and hidden costs. The research revealed an elite group of companies — the top 10% — are more resilient than the majority of respondents, suffering less downtime, having lower total direct costs and experiencing minimal impacts from hidden costs. The report calls these organizations "resilience leaders" and their shared strategies and traits provide a blueprint for bouncing back faster. Resilience leaders were calculated based on frequency of downtime and amount of economic damage experienced from hidden costs. Resilience leaders are also more mature in their adoption of generative AI, expanding their use of embedded generative AI features in existing tools at four times the rate of other organizations.
The Combined Direct and Hidden Costs
The repercussions of downtime are not limited to a single department or cost category. The report surveyed Chief Financial Officers (CFOs) and Chief Marketing Officers (CMOs), as well as security, ITOps and engineering professionals to quantify the cost of downtime across several dimensions.
Key findings on the impacts of downtime include:
■ Revenue loss is the number one cost. Due to downtime, lost revenue was calculated as $49M annually, and it can take 75 days for that revenue to recover. The second largest cost is regulatory fines, averaging at $22M per year. Missed SLA penalties come in third at $16M.
■ Diminishes shareholder value. Organizations can expect their stock price to drop by as much as 9% after a single incident, and on average, it takes an average of 79 days to recover.
■ Drains budgets due to cyberattacks. When experiencing a ransomware attack, 67% of surveyed CFOs advised their CEO and board of directors to pay up, either directly to the perpetrator, through insurance, a third party or all three. The combination of ransomware and extortion payouts cost $19M annually.
■ Curbs innovation velocity. 74% of technology executives surveyed experienced delayed time-to-market, and 64% experienced stagnant developer productivity, as a result of downtime. Any service degradation often results in teams shifting from high-value work to applying software patches and participating in postmortems.
■ Sinks lifetime value and customer confidence. Downtime can dilute customer loyalty and damage public perception. 41% of tech executives in the report admit customers are often or always the first to detect downtime. In addition, 40% of Chief Marketing Officers (CMOs) reveal that downtime impacts customer lifetime value (CLV), and another 40% say it damages reseller and/or partner relationships.
Globally, the average cost of downtime per year is more costly for US companies ($256M) than their global counterparts due to various factors including regulatory policies and digital infrastructure. The cost of downtime in Europe reaches $198M, and $187M in the Asia-Pacific region (APAC). Organizations in Europe — where workforce oversight and cyber regulation are stricter — pay more in overtime wages ($12M) and to recover from backups ($9M). Geography also shapes how quickly an organization recovers financially post-incident. Europe and APAC hold the longest recovery times, while companies in Africa and the Middle East recover the fastest.
"Disruption in business is unavoidable. When digital systems fail unexpectedly, companies not only lose substantial revenue and risk facing regulatory fines, they also lose customer trust and reputation," said Gary Steele, President of Go-to-Market, Cisco & GM, Splunk. "How an organization reacts, adapts and evolves to disruption is what sets it apart as a leader. A foundational building block for a resilient enterprise is a unified approach to security and observability to quickly detect and fix problems across their entire digital footprint."
Resilience Leaders Bounce Back Faster
Resilience leaders, or companies that recover faster from downtime, share common traits and strategies that provide a blueprint for digital resilience. They also invest more strategically, rather than simply investing more. The resilience leaders' common strategies and traits include:
■ Investing in both security and observability. Compared to other respondents, resilience leaders spend $12M more on cybersecurity tools and $2.4M more on observability tools.
■ Embracing the benefits of GenAI. Resilience leaders are also more mature in their adoption of generative AI, expanding their use of embedded generative AI features in existing tools at four times the rate, compared to the remaining respondents.
■ Recovering more quickly. Faster recovery often equates to a better customer experience and less unwanted media attention. Resilience leaders' mean time to recover (MTTR) from application or infrastructure-related downtime is 28% faster than the majority of respondents, and 23% faster from cybersecurity-related incidents.
■ Experiencing less toll from hidden costs. Most resilience leaders experience no damage from hidden costs, or describe it as "moderate." That is in stark contrast with the remaining 90% of organizations that call hidden cost impacts "moderately" or "very" damaging.
■ Dodging financial damage. Resilience leaders reduce revenue loss by $17M, lower the financial impact of regulatory fines by $10M and cut down ransomware payouts by $7M.
Methodology: Oxford Economics researchers surveyed 2,000 executives from Forbes' Global 2000 companies in technology (including security, IT and engineering titles), finance (including Chief Financial Officers) and marketing functions (including Chief Marketing Officers.) The report surveyed 53 countries, in regions including Africa, APAC, Europe, the Middle East, North America and South America. In addition, respondents were from 10 industries: energy and utilities, financial services, healthcare and life sciences, information services and technology, manufacturing, communications and media, public sector, retail, transportation and logistics and travel and hospitality.